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Why Shell Announced Force Majeure On Nigerian Bonny Crude Export

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On Thursday, August 27, Royal Dutch Shell plc’s (ADR) (NYSE:RDS.A) Nigerian unit closed down its two crude pipeline and declared “force majeure” on export of Bonny Light crude, as reported by Reuters.

The Hague-based company closed the Trans Niger Pipeline at Oloma because of a leakage in the pipeline. The company closed down its Nembe Creek Trunkline to stop theft and vandalism of crude oil in the vicinity. Furthermore, the company is working on the maintenance of the pipeline. However, it did not state any timeline for restarting its operation.

Trans Niger Pipeline has a total capacity of carrying around 180,000 barrels of crude per day and is co-owned by Shell’s Nigerian unit, Shell Petroleum Development Company (SPDC) and Nigerian National Petroleum Corporation.

Around 162,000 barrels of crude export per day is going to be stalled by the company, under the force majeure. Previously due to theft and leakages, Shell has been forced quite a few times to close down its pipelines and to pay for the oil spill cleanup. In May, it declared force majeure on Forcados crude oil stream export that halted crude export of 347,000 barrels per day (bpd).

Although this export of 162,000 bpd is only 8.1% of Nigeria’s total export, this can hit SPDC hard. Shell is already struggling with lower crude prices. Its profits fell by $2.3 billion in the second quarter of fiscal year 2015 (2QY15, ended June 30, 2015) and the closing down of the pipeline will add more problems to its income statement.

Shell has been recently in the news because of its drilling plan in the Arctic Ocean. It has been gaining negative reviews from the general public, environmentalists, and politicians. They are concerned about the impact that drilling would have on the natural habitat of the Arctic Ocean. In the past, the company has agreed to pay around $85 million for cleanup of oil spill to Bodo community. Like BP plc (ADR) (NYSE:BP), if any spill would occur, it would cost Shell billions of dollars and a negative image.

Currently, the oil market is in turmoil. The excess crude supply and lower demand from major energy consumers have created an imbalance between crude demand and supply. Although the hoarding of export will reduce crude supply in the market, this will only be for a short period of time. Thus, it cannot be expected force majeure on Bonny Light crude would stabilize the crude market in the long term.


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